Answer E9-16

Calculation for Ending Inventory

Cost Retail
Beginning inventory $ 71,280 $ 132,000
Net purchases $ 112,500 $ 255,000
Goods Available $ 183,780 $ 387,000

Net markdowns $ (6,000)

Goods Available After Price Adjustments $ 381,000
Net Sales $ (11,000)
Ending Inventory at Retail $ 370,000

Cost Ratio (for beginning inventory) 71280/132000 54%

Cost Ratio (for others) (183780-71280) / (381000-132000) 45.18%

Retail Price Incex at 31/12/2009 1.04

Ending Inventory at Retail Price is Deflated $ 355,769

Ending Inventory Ending

at 31/12/2009 Layers at Price Cost Inventory at
Retail Price Retail Price Index Ratio LIFO Cost
$ 355,769 $ 132,000 1 54% $ 71,280
$ 223,769 1.04 45.18% $ 101,101
$ 172,381

Thus Estimated Ending Inventory for 2009 is $ 172,381.

Calculation for Cost of Goods Sold

Net Sales as per Retail Value = $ 11,000

Cost Ratio = 45.18%

Cost of Goods Sold = $ 4,970

Note:
Dollar Value LIFO Retail Method is applying retail method to estimate cost of ending inventory and also
considering price index when prices are fluctuating.
Answer E9-6

Calculation of estimated loss on inventory from fire using Gross Profit Method
Selling Price Cost
Beginning Inventory (Nov 1st) $ 100,000
Net purchases from November 1, to the date of the fire $ 140,000
Goods Available for Sale $ 240,000

Net Sales from November 1, to the date of the fire $ 220,000

Less: Gross Profit $ (77,000)
Estimated Cost of goods sold $ 143,000
Estimated Inventory at Cost $ 97,000
Less: Estimated sale pf usable damaged goods $ (12,000)
Estimated loss on inventory from fire $ 85,000

Thus estimated loss on inventory from fire using Gross Profit Method is
85,000 $.

Explanation:
In Gross Profit Method of Inventory estimation, we follow following steps.

1) Determine Gross Profit (It is given in this question)

2) We Calculate Cost of Goods Available for Sale (Opening Inventory + Net Purchases)
3) We calculate estimated Cost of Goods Sold (Net Sales - Gross Profit on Sales)
4) We calculate Estimated Cost of Ending Inventory (Cost of Goods Available for Sale less
Estimated Cost of Goods Sold)
Answer E9-1

NRV Less Normal Final

Replacement Profit Margin Unit Inventory
Product Cost Cost NRV (Ceiling) (Floor) Value
Product 1 $ 20 $ 18 $ 34 $ 29 $ 20
Product 2 $ 90 $ 85 $ 80 $ 50 $ 80
Product 3 $ 50 $ 40 $ 60 $ 48 $ 48

Notes:
NRV Ceiling means Net Realisable Value (NRV) calculated in normal way. Formul is as follows.
NRV (Ceiling) = Estimated Selling Price - Estimated Disposal Costs

NRV (Floor) is NRV less Normal Profit Margin. (Now please look at following explanation).

In LCM Rule, we have to compare Cost and Market Price and choose the lower value for our Inventory.

1) If the current replacement cost is between the floor and the ceiling, the current replacement cost
is the market price.

2) If the current replacement cost is greater than the ceiling, the ceiling amount is the market price.

3) If the current replacement cost is lower than the floor, the floor amount is the market price.